Landing a Microloan

Column by Steve Strauss

Getting a business loan for a small amount of money is not easy, and it is even more difficult if you've had credit problems. But the good news is that the Small Business Administration (SBA) has a loan that may be just what you need. It's called the SBA Microloan Program. Anyone looking to start a microbusiness — a company with fewer than five employees — or even a small business, should consider the Microloan Program.

SBA as guarantor

The first thing to understand is that the SBA is not in the business of lending money. Rather, it acts as a guarantor and works with about 150 approved lenders nationwide who are the ones who actually make the loan. Says the SBA's Michael Stamler, "The SBA's intermediary lenders have experience making and servicing small loans and providing technical assistance to the borrowers." That means that not only can a microbusiness get a small loan, but the microloan lenders can also offer business guidance in the process.

The Microloan Program lends a maximum of $35,000 to entrepreneurs in any stage of business. According to SBA guidelines, funds can be used for working capital, inventory, supplies, and other equipment, but may not be used to buy real estate or pay down an existing debt.

A real-life example

Jack Gavin and Jonathon Bender are two entrepreneurs who exemplify the benefits of the Microloan Program. Gavin and Bender own Pacific Surf and Skate in Oakland, California. Because the partners had no credit history and no collateral, they were unable to get a conventional business loan. But then they heard about a local organization that might be able to help — the Oakland Business Development Corporation (OBDC), a microloan lender.

SBA microloan funds may not be used to buy real estate or pay down an existing debt.

Working with the OBDC, they developed a business plan and applied for a loan. Shortly thereafter, they obtained a $30,000 SBA microloan. That was three years ago. Today, the loan is paid off (ahead of schedule), and they are no longer a microbusiness — revenues are expected to top $500,000 this year. Says Bender, "The microloan was just what we needed at the time. It helped us get started, and the lender gave us a lot of great advice. They wanted to see us succeed and pay off the loan."

First steps

To obtain a microloan, you will need a business plan that explains what the business is, why the money is needed, and how you plan to repay the debt. The lender will want to see that you plan on running a lean ship; they don't want to lend money for extravagances. So be sure that you are not proposing to spend the money on new furniture, an expensive location, or a top–of–the–line computer system. Frugality will take you far.

To learn more about the Microloan Program, and to find a list of intermediary lenders in your area, go to www.sba.gov, or call 800–U–ASK–SBA.